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Aid for Trade Needs Assessment AzerbaijanTrade and Human Development
Azerbaijan
J U L Y 2 0 1 0
United Nations Development Programme
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Aid for Trade Needs Assessment Azerbaijan
Trade and Human Development
July 2010
United Nations Development Programme
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All rights reserved. No part of this publication may be reproduced, stored in a retrieval system
or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording
or otherwise, without prior permissions.
This is an independent publication commissioned by UNDP. The views expressed in this pub-
lication are those of the author(s) and do not necessarily represent those of the United Na-
tions, including UNDP, or their Member States.
ISBN 978-92-95092-17-4
Copyright UNDP 2010
All rights reserved
UNDP Regional Bureau for Europe and the Commonwealth of Independent States
Manufactured in Slovakia
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he Aid for Trade agenda is one of the most important development-related out-
comes of the 2005 WTO Ministerial Conference in Hong Kong. It targets develop-
ing countries through strengthening their productive capacities, trade-related
infrastructures and the ability to compete in regional and global markets. Trade plays an im-
portant role in development, although the relationship between trade and human develop-
ment is not automatic. In order to be inclusive, trade has to be set in a human development
framework. It needs to be conceived as a tool to enlarge the abilities and choices of people.
The Aid for Trade initiative covers the following categories:
Trade policies and regulations;
Trade development;
Developing productive capacities; trade related adjustment, and; other trade-related needs.
UNDPs regional Aid for Trade project Wider Europe: Aid for Trade for Central Asia, South Cau-
casus and Western CIS, financed in the context of Finlands Wider Europe Initiative, focuses on
the identification of capacity gaps and technical assistance needs both at the national and
sub-regional level in Central Asia, South Caucasus and Western CIS and support to economic
development in the areas located along the selected transport corridors, helping small entre-
preneurs to gain from new trade opportunities.
The Wider Europe Initiative is Finlands harmonised regional development framework. The ini-
tiative targets the following themes: security, trade and development, information, society de-
velopment, energy and the environment and social sustainability. The framework includes
three regional cooperation programmes in Eastern Europe (Belarus, Moldova and Ukraine),
South Caucasus (Armenia, Azerbaijan and Georgia) and Central Asia (Kazakhstan, Kyrgyzstan,
Tajikistan, Turkmenistan and Uzbekistan).
The Needs Assessments produced under the Aid for Trade project form part of a long-term
vision of developing trade capacities, which will benefit human development in the region. The
recommendations presented are expected to constitute the basis for a second phase (2011
2013), focusing on the implementation of the recommendations developed in the national
and regional Needs Assessments.
T
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Team for the preparation of the Publication
Authors
Vagif Rustamov
Rashad Bakhshaliyev
Firdovsi Mutallimov
Advisory Group
Jacek Cukrowski
Massimiliano Riva
Editor
Grigor Harutyunyan
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Acknowledgements
We extend special thanks to the Government of Finland, whose generous contributions in the
context of the Wider Europe: Aid for Trade for Central Asia, South Caucasus and Western CIS initia-
tive made this publication possible.
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TABLE OF CONTENTS
pp
Abbreviations and Acronyms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
I. Country Background: Socio-economic Development Trends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
II. Business Environment and Investment Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31
III. Trade and Trade Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
IV. Trade Facilitation and Market Access. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
V. Sectoral Analysis: Sectoral Competitiveness and Human development . . . . . . . . . . . . . . . . 93
VI. The Financial Crisis and its Impact on Azerbaijan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .117
VII. Trade Policy Response to the Global Crisis and Post-crisis Recovery . . . . . . . . . . . . . . . . . . . 134
VIII. Conclusions and policy matrix: Human Development Challenges
and Trade Needs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143
Annexes
Annex 1. Main socio-economic indicators. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .181
Annex 2. Some comparative data on the Human Development Index . . . . . . . . . . . . . . . . 187
Annex 3. Major ILO conventions ratified by the Government of Azerbaijan . . . . . . . . . . 188
Annex 4. Licensing of activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 191
Annex 5. International Investment Position of the Republic of Azerbaijan . . . . . . . . . . . . 197
Annex 6. Detailed data on investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 199
Annex 7. Balassa Index and Net Export Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .202
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ABBREVIATIONS AND ACRONYMS
ACV Agreement on Customs Valuation
ADB Asian Development Bank
AfT Aid for Trade
AZPROMO Azerbaijan Export & Investment Promotion Foundation
BTC Baku-Tbilisi-Ceyhan Pipeline
CAREC Central Asia Regional Economic Cooperation
CBA Central Bank of the Republic of Azerbaijan
CIS Commonwealth of Independent States
CPI Consumer Price Index
EU European Union
FDI Foreign Direct Investment
GATS General Agreement on Trade in Services
GDP Gross Domestic Product
HBS Household Budget Survey
HDC Human Development ChallengeHDR Human Development Report
HGA Host Government Agreement
HS Harmonized Commodity Description and Coding System
LFS Labour Force Survey
LPI Logistics Performance Index
MDGs Millennium Development Goals
MED Ministry of Economic Development
MFA Ministry of Foreign AffairsMFN Most Favored Nation Treatment
MLSPP Ministry of Labour and Social Protection of the Population
MTEF Medium Term Expenditure Framework
NER Net Export Ratio
NGO Non-Governmental Organization
PSA Production Sharing Agreements
RCA Revealed Comparative Advantage
SITC-3 Standard International Trade Classification Review 3
SOFAZ State Oil Fund of Azerbaijan Republic
8
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his report was commissioned by
the United Nations Development
Programme to assess the impact
of trade policy on human development in
Azerbaijan. The report is based on UNDPs
Guide on Trade and Human Development:
How to Conduct Trade Needs Assessments in
Transition Economies1, which is widely used
to assess the role of trade in human develop-
ment in transition economies.
The report analyses the current situation in the
area of trade and human development and
identifies gaps and needs, presents recom-
mendations on improving the impact oftrade on human development in Azerbaijan,
and possible policy measures in the form of
a policy matrix. The latter is designed to im-
prove the relevant legislative basis and insti-
tutional, economic and supportive mecha-
nisms. Furthermore, a donor activity matrix,
which summarizes trade related activities of
international and regional organizations, wasprepared in order to facilitate coordination and
understanding of ongoing projects and pro-
grammes in the country. The results matrix also
considers the gaps of the donor matrix.
The report applies a comprehensive survey
methodology in order to cover all aspects of
the impact of trade on human development,
starting with an analysis of the current situa-
tion related to the trade and human devel-
opment pillars, continuing with an
examination of the impact of trade on GDP,
income, employment, education, invest-
ment, CPI, budget revenues, etc. as well as
analyzing the competitiveness of the differ-
ent sectors and sub-sectors of the economy.
The study utilises different methods, such as
the Revealed Comparative Advantage (Bal-
assa, NER) SWOT, PEST and finalizes with rec-
ommendations to enhance trade from a
human development perspective. These rec-
ommendations are later on compiled as apolicy matrix to be used by the government
and donor community.
To some extent, the results of this report are
optimistic about the positive role that trade
can play in strengthening human develop-
ment. However, the analysis demonstrates
that there is much room for improvementand strong commitment is needed from the
different stakeholders, especially considering
the consequences of the recent global eco-
nomic and financial crisis. Increased efforts
are needed to strengthen the positive im-
pact of trade on human development, such
as improvements in business environment,
10
EXECUTIVE SUMMARY
1 Available at http://europeandcis.undp.org/poverty/trade/show/8BD35D19-F203-1EE9-B08767E3833D66C6
T
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productive capacity, export promotion, trade
policy, trade facilitation, market access etc.
Trade and trade policy clearly are one of, if
not the most important, means to overcomehuman development challenges. However,
trade policy must be strategic, realistic, tar-
geted, comprehensive and timely.
All data utilized in the Report is mainly pro-
vided by SSC, unless indicated otherwise.
11
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uring the Soviet era Azerbaijan
economy was an integral part of
Soviet labor division. The collapse
of the Soviet Union resulted in the economic
disintegration between the former republics,
industrial decline, lack of investment and in-
novation, raise of prices and unemployment
and decrease in welfare indicators. For the
period of 1991-1995, GDP faced a 58.1%
(overall industrial production 72%) decline.
The country started to emerge from the cri-
sis in 1996 and Azerbaijans macroeconomic
stability and growth since 1997 has been im-
pressive.
The economy of Azerbaijan is dominated by
natural resource-based revenues, especially
revenues from the oil sector, which have
risen in spectacular ways in the recent years.
This has facilitated a rapid economic growth,
estimated at over 9.3% for 2009 (in 2008
10.8%, in 2007 25%, in 2006 34.5%). This
dynamic growth has stimulated non-oil sec-tor development. Nevertheless, the non-oil
sector still exhibits large development po-
tential. Real GDP growth in agriculture was
only 3.5% and the sector generated only
6.7% of GDP in 2009, while its share in total
employment was about 38.5%. Today the oil
sector generates approximately half (47%) of
the GDP, but only 1.0% of all jobs. Besides
this, since 1995, a substantial part of FDI fo-
cused on the oil sector. Today the main chal-
lenge is to convert "black gold" oil into
"human gold" human capital (people
with skills and opportunities)and the rel-
evant measures need to continue in order to
ensure the full and effective use of trade in
the realization of this challenge. The impact
of trade on human development has to be
carefully evaluated, gaps have to be removed
and adjustments have to be made in order
to maximize the gains from foreign trade.
In late 2006, the Government indicated a
keen interest in accelerating World Trade Or-
ganization (WTO) accession efforts and put-ting in place a comprehensive legislative and
regulatory framework required to facilitate
the countrys entrance into the WTO. This in
turn creates the institutional momentum
needed to carry out necessary policy and ad-
ministrative reforms required to place the
non-oil/gas economy on a robust and sus-
tainable broad-based growth path.
In order to be competitive and gain more
from foreign trade, Azerbaijan has to diver-
sify its economy and carry out structural
changes in the national economy. These
changes have to be based on thorough and
holistic research and analysis. In other words,
it is very important to identify the non-oil
sectors (products) and sub-sectors of the
12
INTRODUCTION
D
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economy which are competitive in interna-
tional markets and which have a potential to
promote job creation and income, spur ex-
ports and attract foreign investments.
The current study endeavors to address the im-
pact of trade on human development by ex-
amining the impact of trade on the countrys
human development issues, such as income,
employment, education, life expectancy, etc.
Furthermore, the study examines the com-
petitiveness of the different sectors and sub-
sectors of the economy. The different results
of the study are used in order to assess the
impact of trade on human development.
Moreover, the impact of the recent global eco-
nomic and financial crisis was analyzed with
a special focus on human development and
relevant recommendations were prepared in
order to propose impact mitigation strategies.
The objective of the study is to carry out ananalysis of trade and human development in
Azerbaijan through a needs assessment with
a strong human development focus and
within this context, to develop recommen-
dations to improve the normative-legal basis,
the institutional, economic and supportive
mechanisms for strengthening the positive
impact of trade on human development. Thefinal objective of the study is to present a pol-
icy matrix proposing different measures and
interventions targeting trade development
within a human development framework.
In order to reach this objective, the tasks are
set and realized as follows:
Trade and human development: method-
ological approach;
Study of existing experiences in the field
of trade and human development;
Analysis and evaluation of the current sit-
uation regarding trade and human devel-
opment in the Republic of Azerbaijan, aswell as:
Monitoring and evaluation of national
legislation, institutional, economic and
supportive mechanisms, in the context of
the Aid for Trade categories;
Executive summary of the work under-
taken in the area of human development
in the country;
Analysis of the impact of trade on different
aspects of human development (eco-
nomic growth, employment, poverty, ed-
ucation, life expectancy, etc.)
Identifying core issues to be addressed
with a special reference to the challenges
and prospects during and after the global
economic and financial crisis;
Identification of policy measures and pro-grams to be presented to the government
and donor community as well as:
Preparing recommendations on improv-
ing national legislation, institutional, eco-
nomic mechanisms;
Preparing recommendations on strength-
ening the coordination between the gov-
ernment and the donor community; Elaborating a policy matrix.
According to the above-mentioned objec-
tives and tasks, the methodology of the
study is based mainly on desk surveys
(analysis and evaluation of the situation in
the country, and as a result identification of
possible directions for improvement, and
preparation of suggestions and recommen-
13
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dations), discussions and interviews with
stakeholders and an expert assessment.
The Report contains the following chapters:
Chapter one (Country Background: Socio-
economic Development Trends) presents
a brief country background, recent develop-
ment stages of the national economy and
objectives of the current socio-economic de-
velopment strategy. Relevant features of
macroeconomic framework, particularly
those which relate to trade and human de-
velopment issues are also highlighted in this
chapter.
Chapter two (Business Environment and
Investment Policy) provides broad informa-
tion on the countrys overall level of compet-
itiveness and identifies the main barriers and
obstacles. Business environment and invest-
ment policies are elaborated in line with tradeand human development related issues. The
evolution of foreign and domestic invest-
ment flows and their structure are analysed.
In order to elaborate measures to enhance
the business environment, the results of the
Doing Business Review are analysed and rec-
ommendations are developed.
Chapter three (Trade and Trade Policy)
presents and analyses the structure and evo-
lution of foreign trade trends, trade policy,
the institutional mapping, bilateral and mul-
tilateral trade agreements and the WTO ac-
cession issue.
Chapter four (Trade Facilitation and Mar-
ket Access) provides a review of customs
and tariffs procedures, storage and trans-
portation issues and costs, red tapes and
other barriers to trade with the aim of in-
creasing efficiency of foreign trade, raising
quality of respective services and identifyingways and directions for reducing costs. Spe-
cial emphasis is given to the problems of
SMEs in this regard.
Chapter five (Sectoral Analysis: Sectoral
Competitiveness and Human Develop-
ment) studies a number of key sectors (prod-
ucts) based on Revealed Comparative
Advantages analyses that have potential for
development (especially export potential)
and an impact on human development. A
general overview of the sectors (products)
identified as competitive, SWOT analyses, as
well as, employment impact, export poten-
tial and opportunities are elaborated in the
chapter.
Chapter six (The Financial Crisis and its Im-
pact on Azerbaijan) provides an analysis of
the impact of the global financial and eco-
nomic crisis on the national economy
through the different transmission channels,
with a particular emphasis on trade and
human development issues.
Chapter seven (Trade Policy Response to
the Global Crisis and Post-crisis Recovery)
elaborates national trade policy responses in
the period of the global crisis (and post crisis
recovery) and provides recommendations for
national trade policy actions aimed at im-
proving Azerbaijans economic and human
development.
14
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The final chapter (Conclusions and Policy
Matrix: Human Development Challenges
and Trade Needs) summarizes the results,
findings and recommendations made. At the
same time, this chapter draws out a policymatrix with concrete measures for imple-
mentation: i) for policy makers and ii) donor
community. A matrix of current donor
(donors involved in the Aid for Trade initia-
tive) commitments in the area of trade in
Azerbaijan is included.
15
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his chapter presents a brief coun-
try background, recent develop-
ment stages of the national
economy and its objectives. Relevant fea-
tures of the macroeconomic framework, par-
ticularly those, which relate to trade and
human development issues are also high-
lighted in this chapter.
A. Economic Development
Following a sharp decline in the early 90s,
Azerbaijan achieved stable and rapid growth
starting from 1996. Shortly before independ-
ence, the economy of the country was char-
acterized by a rapid decline of economic
growth, a decrease in the absolute volume
of production, substantial differences be-tween production and consumption, a de-
cline in economic efficiency indicators, an
imbalanced structure of the economy and
low levels of integration. These were the first
signs of the economic crisis, followed by the
profound economic crisis of the first years of
independence (1992-1994) (See: Table 1.1).
For the period of 1991-1995, GDP faced a de-
cline of 58.1% (overall industrial production
72%). As a result of the crisis, living standards,
nominal incomes, wages and consumption
of population witnessed a sharp decline.
The ensuing period, between the years 1995-
2004, was characterized as a period of
strengthening macroeconomic stability and
maintenance of economic growth (See:
Annex 1). During this period, Azerbaijan sta-
bilised the socio-political situation in the
country, introduced systematized economicreforms, ensured the support of international
organizations to the reform process, adopted
and implemented a number of programmes,
ensured macroeconomic stability and re-
stored economic growth (control of inflation,
ending budget deficit financing by the Cen-
tral Bank, ratio of budget deficit to GDP de-
creased to 1-2%). Since 1997, a dynamiceconomic growth was observed (in 1996,
GDP increased by 1.3%, in 1997 by 5.8% and
during 1998-2004 on average by 10.0%). As a
result of the privatization process and the de-
velopment of entrepreneurship, the share of
the non-state sector in GDP reached 73.5%
in 2004. The State Oil Fund of the Republic of
Azerbaijan was established. The flow of FDI
into the economy increased.
16
I. COUNTRY BACKGROUND:
SOCIOECONOMICDEVELOPMENT TRENDS
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The country became one of the main play-
ers in the development and the implemen-
tation of several big regional projects such as
the Great Silk Way, TRACECA, fiber optic com-munication cable bus, the construction of
the Baku-Tbilisi-Ceyhan oil pipeline and the
Baku-Tbilisi-Erzurum gas pipeline, as well as
the development of the North-South trans-
port corridor.
A number of large development pro-
grammes and economic policy measures to
ensure the sustainability of dynamic socio-
economic development processes in the pe-
riod from 1995 to 2004 and beyond, such as
State Programme on SME Development in
the Republic of Azerbaijan (2002-2005), De-
mographic Development Concept of the Re-
public of Azerbaijan, State Programme on
Tourism Development in the Republic of
Azerbaijan (2002-2005), State Programme
on Poverty Reduction and Economic Devel-
opment (2003-2005), State Programme onSocio-Economic Development of Regions (I
Programme-2004-2008 and II Programme-
2009-2013), Long-term Strategy of the Man-
agement of Oil and Gas Revenues, State
Programme on Poverty Reduction and Sus-
tainable Development (2008-2015) were
adopted and implemented.
Simultaneously, the Government annually
prepares the Social-Economic Development
Concept of the Republic of Azerbaijan2, inte-
grating a forecast for the next 3 years (one
plus three principle, which is also applied
during the budget formulation process
called Midterm Expenditure Framework). The
17I . C O U N T R Y B A C K G R O U N D : S O C I O - E C O N O M I C D E V E L O P M E N T T R E N D S
1991 1992 1993 1994
Real GDP, % 99.3 76.8 59.1 47.5
Industrial production, % 91.1 63.4 50.9 38.3Agricultural production, % 100.3 76.4 64.6 56.3
CPI (inflation), times 2.06 21.0 257.1 4533.2
Nominal income of population, times 2.1 16.0 142.0 1278.4
Real average monthly wage level, % 79.0 66.0 43.6 17.3
Consumption expenditure of households, % 87.4 41.1 23.9 13.5
Capital Investments, % 79.2 47.3 28.8 54.4
Decline in living standards of population, times 0.98 1.3 1.8 3.6
Table 1.1: Evolution of main socio-economic indicators from 1991 to 1994 (1990=100%)
Source: SSC
2 See: www.economy.gov.az
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18 I . C O U N T R Y B A C K G R O U N D : S O C I O - E C O N O M I C D E V E L O P M E N T T R E N D S
The main features of the 2009 Social-Economic Development Concept
of the Republic of Azerbaijan
The Concept consists of the following parts:
i) Development of the global economy and its midterm trends;
ii) Results of socio-economic development in 2007;
iii) Semi-annual socio-economic development in 2008;
iv) Priorities of socio-economic development in 2009-2012;
v) Macroeconomic policy;
vi) Finance market and priorities for the development of finance institutions;
vii) Foreign trade policy;
viii) Development of entrepreneurship;ix) Development of economic and social sectors.
The Concept covers the strategic goals of the country to be achieved in the coming years.
The overall goal of the Concept is to achieve sustainable development and decent living
conditions of the population through the establishment of a free market economy on the
basis of competition, efficiency and fair distribution of resources. The following objectives
are identified in order to achieve the strategic goal of the Concept:
Ensuring sustainable and balanced economic development; Ensuring decent living conditions of the population;
Ensuring integration into the global economy;
Ensuring environmental sustainability.
Due to the Concept, the Government recognizes the importance of human development
and expanding trade in Azerbaijan. For this purpose, trade related priorities like i) the sim-
plification of foreign trade procedures; ii) the diversification of the structure of imported
and exported goods; iii) the diversification of the geographical structure of import and ex-
port; iv) analyses of possibilities to protect the domestic market within the framework of
WTO principles; v) improving trade policy with regards to stimulating the production of
import substitution goods; investigation of possible benefits from preferential trade
regimes; vi) improving trade statistics; vii) analyzing the role of e-trade in foreign trade and
etc. are identified in the Concept. A special emphasis is given to improving the quality of
education and health services, as well as access to these services, also ensuring decent em-
ployment through support to the private sector, especially, SMEs development. Further-
more, the Government has identified the development of ICT as one of its main priorities.
Box 1.1
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latest version of this was prepared for 2009
and it covers human development and trade
related goals and objectives (See: Box 1.1).
The Concept is an integral part of the State
Budget Formulation Process and is submit-ted to the National Parliament together with
the Draft State Budget for review and ap-
proval.
Alongside with the Concept, a long term de-
velopment strategy and programmes are
very important for the future development
of the country. Such programmes could as-
sist in the prioritization of the activities of the
national government and the international
community.
According to SSC data, despite the global
economic crisis, Azerbaijan's rapid economic
growth continued in 2008 and 2009 with
10.8% and 9.3% GDP growth rates respec-
tively (this indicator was 25.1% in 2007 and34.5% in 2006). These figures are considered
as one of the world highest for that period.
GDP per capita increased by 7.9% in 2009
and reached 4874.1 USD in current prices.
The volume of the industrial sector increased
by 8.6% and totaled 22.2 bln. AZN. 75.7% of
this is produced by the mining industry. The
economy of the country is highly dependenton the oil and gas mining sector. Today, the
oil sector generates approximately half
(47.0%) of GDP, but only 1.0% of total em-
ployment. In 2009, the non-oil sector grew
by 3.2%3, driven mostly by the development
of services and the construction sector, both
of which benefited from increased demand
of the oil sector. At the same time, the col-
lapse of oil prices during the second half of
2008 and at the beginning of 2009 demon-
strates the importance of continuing to pro-
vide special attention to the development ofnon-oil sectors.
The country's output is largely produced by
private businesses.Their share constituted
81.2% of GDP in 2009. This is the result of sev-
eral stages of privatization of the formerly
state owned properties and the develop-
ment of new privately owned industries.
However, a number of key segments of the
economy are still state controlled. Many of
them are now "open for privatization" due to
the Presidential Decrees for the creation of
additional investment opportunities. The
government uses several methods of privati-
zation, the most popular being the acquisi-
tion by a "strategic investor" or via an
"investment tender".
According to statistical data from the Central
Bank of Azerbaijan (CBA), real appreciation of
the local currency manat (AZN) increased
by 20% since 2005, affecting the non-oil sec-
tors competitiveness. In fact, according to
the SSC, labor cost in the non-oil sector,
measured by the wage rate, increased 3.6times since 2007. This is a much higher rate
compared to the increase of productivity.
The above shows clearly that the non-oil sec-
tor is facing a loss of competitiveness. There
is a necessity to diversify the economy and
target sustainable development through a
competitive non-oil sector.
19I . C O U N T R Y B A C K G R O U N D : S O C I O - E C O N O M I C D E V E L O P M E N T T R E N D S
3 Growth of 11.8% in 2006, 11.3% in 2007 and 15.7% in 2008.
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Although the level of inflation was relatively
high in 2006-2008, it substantially decreased
in 2009. According to recent figures pre-
sented by the SSC and CBA, the average in-
flation rate reached 20.8%
4
in 2008 and 1.5%in 2009. The high inflation rate was mainly
due to increased budget expenditures, in-
flow of substantial oil revenues into the
economy and the inflation processes on the
global level (high price for energy carriers re-
sulted in an increase of the price of manu-
factured goods and agricultural products,
globally) in previous years, while its decrease
in 2009 was associated with the global fi-
nancial and economic crisis.
Agriculture is still the dominant economic ac-
tivity in terms of employment. Thus, in 2009,
the agricultural sector provided for 38.5% of
the employment in the country, generating
6.7% of GDP. The average monthly wage in the
sector (174.5 AZN or 168.1 USD) is lowerthan the country average (298 AZN or 372.5
USD). Cotton is one of the leading cash crop,
together with grapes (for wine production),
fruits, nuts, vegetables, and tobacco. The de-
velopment pace of the sector is slow in com-
parison to other sectors of the economy
around 4-5% per year. Considerable progress
is being made, particularly in the allocation offarm lands to peasants and the issuance of
land titles to new farmers. This process began
in 1996 in 1,745 former state and collective
farms which the Government decided to pri-
vatize. The cultivable land on those farms was
allocated to farm members. During this
process some 869,268 land titles were is-
sued to rural families (96% of the families arein rural settlements).5 Considering the un-
derdevelopment of the sector, a major role in
the framework of the newly adopted SP-
PRSD is given to the development of the agri-
cultural sector as a main source of income gen-
eration and combating poverty in rural areas.
The establishment of an Agricultural Bank aim-
ing at improving access to credit resources and
encouraging private investment in the agri-
cultural sector is expected. Credits in the
area of agriculture are managed by non-
banking credit organizations. In the long run,
an agriculture that is poor in investment and
capital can hardly be sustainable and com-
petitive, even in internal markets. Therefore, the
agricultural sectors main development priority
is to achieve an increase in productivity,which can be done through the use of ad-
vanced technologies and a transition from sub-
sistence farming to agricultural businesses.
Azerbaijan has one of the lowest external
debt/GDP ratios in the region and a sound
financial system. According to the Ministry of
Finance, the level of external debt equaled3.4 bln. USD (7.95% of GDP) by the end of
2009. The level of external debt per capita is
380.3 USD (See: Table 1.2).
20 I . C O U N T R Y B A C K G R O U N D : S O C I O - E C O N O M I C D E V E L O P M E N T T R E N D S
4 In 2006, the inflation rate was 8.3% and in 2007, 16.7%
5 There are nine climatic zones in Azerbaijan and due to this, incomes from land depend not only on the size of land the
household owns or uses, but also on the quality of soil and yield per hectare accordingly. For example, the farmers in
Lankaran rayon which is a subtropical zone and in which almost all households have less than one hectare of land earn much
more than the farmers in Kurdemir, Yevlakh or Gobustan rayons where the average size of privatized land per family is 2.59,
2.48 and 4.98 hectares respectively.
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The CBA consistently pursued the "stablemanat" policy from 1997 to 2006, with the
annual inflation rate not exceeding single
digit figures. This tendency only changed in
2008-2009, due to the inflow of oil revenues
and other factors discussed later in this
paper. As a result of timely measures, infla-
tion diminished again to the single-digit
level of 1.5% in 2009.
The fiscal system is characterized by a lowstate budget deficit, which does not exceed
1% of GDP. In 2009, the deficit stood at 0.7%
of GDP (in 2008 0.03% and in 2007 0.2%
of GDP).
In 2008, surplus of the balance of payment was
16.5 bln. USD (33.7% of GDP), reflecting a four-
fold increase from 2007. This is mainly due to
the increase of oil production and export. The
21I . C O U N T R Y B A C K G R O U N D : S O C I O - E C O N O M I C D E V E L O P M E N T T R E N D S
Table 1.2: External debt indicators
1995 2001 2002 2003 2004 2005 2006 2007 2008 2009
External debt
stocks, total
(current
million USD)
321,0 1277,8 1948,8 1814,9 1986,4 3021,4 3001,1 3421,8 321,0 1277,8
Total debt
service (% of
exports of
goods and
services)
40,4 50,8 43,4 20,1 13,3 12,6 40,4 50,8
Official devel-opment assis-
tance and
official aid
(current
million USD)
118,6 229,2 175,9 224,6 205,6 225,3 118,6 229,2
Total debt
(% of GDP)13,3 22,4 22,5 13,7 9,5 9,1 6,4 7,95 13,3 22,4
Total debt
service paid
(million USD)
10,1 126,2 232,3 231,1 244,6 167,5 287,7 10,1 126,2
Source: http://ddp-ext.worldbank.org/ext/DDPQQ/report.do?method=showReport and Country partnership strategy progress
report for Azerbaijan. For the period fy07 fy10. April 1, 2008. IBRD, IDA and IFC. Document of The World Bank; SSC and Global
Development Finance Online ( World Bank 2008), Statistical Compendium 2004-1 CD-ROM (OECD 2004), country sources.
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surplus of the balance of payment was equal
to 2.7 bln. USD in 2009 (6.3% of GDP).
Today, the main objectives of the national
socio-economic development strategy arethe strengthening of the economic potential
of the country and its efficient implementa-
tion, development of the non-oil sector (in-
creasing competitiveness), facilitatation of the
effective integration into the global economy
(including WTO accession process), full and ef-
ficient realization of the potential of each eco-
nomic region and harmonization of their
development levels, enhancement of em-
ployment opportunities, development of en-
trepreneurship, increasing the volume, quality
and access of social services, reducing poverty
and ensuring environmental protection, eco-
logical safety and sustainable development. A
sustainable improvement in the business en-
vironment and the investment climate in the
non-oil sector is crucial to ensure the diversifi-cation of the economy.
B. Human Development Pillars
Azerbaijan belongs to the group of CIS states
with fast growing populations (See: Annex-
1). Although the total birth rate (live births perwoman aged 15-49) has declined from 2.9 in
the late 1980s to 2.05 at present, it is still among
one of the highest in the region. In compar-
ison, in Ukraine, the total birth rate equals 1.25,
in Russia 1.40, in Armenia 1.35 and in Geor-
gia 1.446. The age structure of the popula-
tion in Azerbaijan is also very favourable to
population growth. The country has one of the
lowest old age dependency among CIS states:
the ratio of population aged 60 years and pop-ulation aged 15-59 is only around 9.5% (2009),
compared to 17.9% in Russia, 22.1% in Ukraine,
16.1% in Armenia and 20.7% in Georgia7.
The population is almost evenly distributed
between urban and rural areas, with 54.1%
residing in urban areas.
The labour market in Azerbaijan is in a de-
velopmental stage and measures are being
implemented to enhance job opportunities
(Figure 1.1). By 2008, 57.0% (HBS data) of the
working age population (aged 15-64) has
employed, which is slightly below the level
in neighbouring Georgia, 57.4% (2007) but
higher than in Armenia. The employment
rate is much lower than in some transitioneconomies, such as Estonia (68%) and the
Czech Republic (65%).
A number of measures have been introduced
in order to increase employment levels and im-
prove the effectiveness of the labour market.
These include: the creation of better conditions
to promote entrepreneurship and self-em-ployment, boost investment activity, strength-
en social protection, legalise informal em-
ployment and improve institutional capacity.
The government, in cooperation with the In-
ternational Labour Organisation, has prepared
22 I . C O U N T R Y B A C K G R O U N D : S O C I O - E C O N O M I C D E V E L O P M E N T T R E N D S
6 CIA World Factbook 2008, https://www.cia.gov/library/publications/the-world-factbook/index.html, note: Unless otherwise
noted, information in this page is accurate as of January, 2010
7 http://hdrstats.undp.org/en/indicators/147.html
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23I . C O U N T R Y B A C K G R O U N D : S O C I O - E C O N O M I C D E V E L O P M E N T T R E N D S
Figure 1.1: Main Characteristics of Azerbaijans Labour Market: Unemployment, Employment
and Economic Activity Rate (Aged 15-64), the 2008 HBS Data, %
0
10
20
30
40
50
60
70
80
Total Urban Rural
Source: Household Budget Survey 2008 (SSC), authors estimations.
10.0
63.357.0
13.7
48.1
55.8
6.7
57.0
72.1
Unemployment rate Employment rate Economic activity rate
Figure 1.2: Main Characteristics of Azerbaijans Labour Market: Unemployment, Employmentand Economic Activity Rate by Gender, 2008 HBS Data, %
0
10
20
30
40
50
60
70
80
Unemployment rate Employment rate Economic activity rate
90
Source: Household Budget Survey 2008 (SSC), authors estimations
8.111.4
51.5
76.5
Females Males
47.3
67.8
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the employment strategy of the Republic of
Azerbaijan 2006-2015. The strategy is focused
on implementing programs, promoting decent
work and ensuring equal opportunities for men
and women. It also focuses on educationand vocational training as well as the devel-
opment of small and medium-sized enterprises.
In May 2007, the Program on the implemen-
tation of the employment strategy of the Re-
public of Azerbaijan for 2007-2010 was ap-
proved by presidential decree. The key ob-
jective of this program is the reduction of un-
employment, the improvement of the labour
market, social protection of the unemployed
and vulnerable groups. The complete imple-
mentation of the strategy and the program will
require adequate leadership among the dif-
ferent ministries involved and effective mon-
itoring mechanisms.
According to the 2003 and 2006 LFS data
and the 2008 HBS data, there has been a
remarkable increase in employment of
females, while employment rates among
males have remained stable. Most of the em-
ployment growth among females is in the in-
formal sector, especially in subsistenceagriculture. There are still significant gender
differences in the participation of males and
females in the labour force of Azerbaijan,
which reflects the duality of the labour mar-
ket. According to the HBS 2008 data, the em-
ployment rate of females aged 1564 is
47.3% compared to 67.8% for males; unem-
ployment rate is lower for females, 8.1% com-
pared to 11.4% for males indicating that
women are less economically active.
The informal economy and employment
in the informal sector is sizeable in Azer-
baijan. According to the SSC, the informal
economy has been on average 17.6% of offi-
cial GDP in 2002-2006. This figure was 9% for
2008-2009.
24
With employment contract Without employment contract
2003 2006 2003 2006
Total 54.7 40.5 45.3 59.5
Including:
Males 56.2 47.8 43.8 52.2
Females 52.6 32.4 47.4 67.6
Urban 81.9 60.9 18.1 39.1
Rural 26.7 29.1 69.4 70.9
Table 1.3: Structure of employment of population by employment status in 2003 and 2006,
LFS data; %
Source: MLSPP and SSC 2008
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The decreasing size of the informal economy
over the recent years can be explained by the
fact that the share of the oil sector in GDP has
increased due to the high level of foreign in-
vestment in these areas, resulting in the ex-
haustion of informal economic activities in thesector. The increase in the share of the oil sec-
tor and elimination of informal economic ac-
tivities in this sector have led to a decrease in
the share of other industries and consequently
the share of informal economy in GDP. How-
ever, given that the oil sector is a capital-inten-
sive industry that provides employment for
about 1% of the workforce, the conclusion canbe made that the absolute value of the infor-
mal economy is not decreasing.
LFS data identified that, between 2003 and
2006, the share of workers employed without
employment contracts increased from 45.3%
to 59.5% (Table 1.3). There is a sizeable infor-
mal employment within the formal sector as
well. Furthermore, the proportion of people
in various forms of self-employment is very
high; this tends to confirm the prevalence ofunprotected forms of labour, informal labour
and work in precarious conditions.
Minimum wages were kept low for quite a long
period. Only since 2001 have minimum wage
levels started to slowly increase. However, in
2007, minimum wages were still only 23% of the
average wages in the country (Figure 1.3). In ear-ly 2008, minimum wages were raised to 60 AZN8,
and from September 2008, to 75 AZN, which
equaled 29% of the average monthly nominal
wage at that time (257 AZN)9. In August 2010
mimum salary wage increased to 85 AZN. Ac-
25I . C O U N T R Y B A C K G R O U N D : S O C I O - E C O N O M I C D E V E L O P M E N T T R E N D S
8 According to CBA, in 2009 1USD=0.80 AZN, in 2008 1USD=0.80 AZN, in 2007 1USD=0.84 AZN, in 2006 1USD=0.87 AZN, in
2005 1 USD=0.92 AZN, in 2004 1USD=0.98 AZN.
9 See: http://www.azstat.org/statinfo/labour/en/024.shtml#s1
Figure 1.3: Evolution of minimum wages and average monthly nominal wages in 2000-2009, AZN
0
50
100
150
200
250
300
350
2001 2002 2003 2004 2005 2006 2007 2008 2009
Source: SSC 2009
Average minimum monthly wage Average nominal monthly wage
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cording to the wage survey conducted in No-
vember 2007, only 2.9% of full time employees
earned salaries below the level of minimum
wages of 50 AZN for that period.
In recent years, average real wages are in-
creasing at double digit rates, from over 20%
in 2003 and 2004, to 11-13% in 2005 and
2006 and to 23% in 2007 and 2008. In 2009,
nominal average monthly wages reached
the level of 298 AZN, compared to 274 AZN
in 2008, an increase of about 28% in real
terms. Disparities in average wages in differ-
ent sectors are also enormous. In private
mining and quarrying sector, monthly wage
levels exceeded 1630.5 AZN in 2008, being
on average 10-15-fold higher than in thelowest-paid sectors: agriculture, public
health, social work and education (Table 1.4).
Azerbaijan ratified most of the major ILO
conventions (See: Annex 3).
In 2008, the Government adopted the State
Programme for Poverty Reduction and
Sustainable Development (2008-2015),
26 I . C O U N T R Y B A C K G R O U N D : S O C I O - E C O N O M I C D E V E L O P M E N T T R E N D S
Public sector Private sector
Agriculture, hunting and forestry 115.9 112.1
Fishing 110.5 80.4Health and social work 123.4 204.3
Education 213.5 229.7
Wholesale and retail trade 226.6 210.5
Manufacturing 292.3 218
Electricity, gas and water supply 285.9 255.3
Public administration and defence 325.4 108.9
Hotels and restaurants 225.9 267.4
Transport, storage and communications 281.9 549.9
Construction 373.1 432
Real estate 284.4 961.6
Financial intermediation 593.1 814.7
Mining and quarrying 623.1 1630.5
Overall 232.4 342.7
Table 1.4: Average monthly wages in private and public sectors in 2008, AZN
Source: SSC at: http://www.azstat.org/statinfo/labour/en/004_1.shtml
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with the principal objective of supporting
the vast improvements achieved during the
implementation of the State Programme on
Poverty Reduction and Economic Develop-
ment (2003-2005) and meeting the chal-lenges set out in the Millennium Declaration:
improving material welfare of the popula-
tion, reducing poverty by half by 2015 and
providing social protection to the vulnerable
strata of the population. The adopted SP-
PRSD is aligned with the MDGs and sets
country-specific targets. It integrates other
current state programs, the MTEF and State
Budgeting processes, as well as the PIP. The
SPPRSD is based on a participatory process
involving the government, international or-
ganizations and civil society. It incorporates
gender, youth policy, childrens rights, envi-
ronmental and other cross-cutting issues.
While the poverty rates have decreased overthe last years mainly due to significant GDP
growth, poverty is still a challenge. According
to government estimations, based on the na-
tional absolute poverty line (see, Table 1.5),
about 13.2% of the population lived in
poverty in 2008 (down from 46.7 % in 2002)
and 11.0% in 2009. The main source of rural
poverty is the lack of access to basic services
and poor physical infrastructure, while urban
poverty is linked to the lack of employment
opportunities and wage levels.
27I . C O U N T R Y B A C K G R O U N D : S O C I O - E C O N O M I C D E V E L O P M E N T T R E N D S
Unit 2002 2003 2004 2005 2006 2007 2008 2009
Absolute poverty
line10AZN 35 35.8 38.8 42.6 58 64 70 89.5
Absolute poverty
rate% 46.7 44.7 40.2 29.3 20.8 15.8 13.2 11.0
Relative poverty
rate11% 8.8 12.0 8.7 6.1
Extreme poverty
rate12% 9.6 4.9 2.2 2.0 1.6 1.2 1.0
Table 1.5: Rate of poverty in Azerbaijan, HBS results 2002-2009
Source: WB and SPPRED Secretariat estimates for 2002-2005, SSC estimates for 2006-2009.
10 The absolute poverty line is estimated as the value of minimum consumption basket. The minimum consumption bas-
ket is based on the value of three sub-minimum baskets, namely that for food products, non-food products and services.
11 A relative poverty line is estimated as 70.0% of median consumption expenditure.
12 An extreme poverty line is estimated as the value of the minimum food basket.
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Table 1.5 summarizes the poverty rates in the
country using the HBS results for 2002-2009.
As shown in the above table, poverty rates in
the country have dropped significantly over
the recent years. Nonetheless, every ninthperson still faces the risk of poverty.
Analysis of the HBS data for 2002-2009 sug-
gests that there are regional differences in
poverty rates;13 Baku has a notably lower
poverty incidence than the other regions;
there are no significant differences in the
poverty rates for males and females; the
poverty risk increases upon increase of
household size; poverty risk is low for edu-
cated households; there is a high poverty risk
for those who are of working age (where the
head of household is in the 30-39 and 40-49
year age groups). These factors are associ-
ated with poverty risk in the country and
need to be taken into account when formu-
lating priority policy actions for human de-velopment in the country.
While the Azerbaijan HBS data satisfy most
empirical regularities expected in a typical
household survey data, the inequality meas-
ures based on the data are unusually low. For
example, for the latest years (2005-2008), the
Gini coefficient of consumption (the com-monly used measure of inequality) is in the
range of 0.17-0.22. This is among the lowest
Gini coefficients ever observed in any coun-
try, and is extremely low even with the stan-
dard of countries generally considered as
most equal in the world. On the other hand,
international sources (www.hdrstats.undp.
org/en/indicators/147.html, http://go.world-
bank.org/NT2A1XUWP0, etc) show that
today the Gini coefficient for Azerbaijan is in
the range of 0.31-0.38.
This discrepancy is mostly due to the diffi-
culties that emerged during the implemen-
tation of HBS. In most cases high income
households tend to refuse to respond to the
HBS questionnaire. This is one of the main
reasons of the low Gini coefficient (0.17-0.22).
For the calculations of the Gini coefficient in-
ternational organizations use different cor-
rection methods in order to take into
consideration non-response cases by high
income households.
According to official information, infant and
maternity mortality rates (Annex 1) show
a downward trend, but a slow one. Results
obtained by an alternative different survey
suggest that the official figures substantiallyunderestimate the scale of the problem.
There is a need to increase public investment
in accessible, quality and affordable mater-
nal health services.
School enrolment rates are high (Annex 1),
but there are growing concerns in the differ-
ences in quality of education provided atschools. An increase in public investment in
education is necessary to address these dif-
ferences and to ensure that all children are
provided with the same opportunities.
Housing conditions for the vulnerable
strata of the population are unsatisfactory,
28 I . C O U N T R Y B A C K G R O U N D : S O C I O - E C O N O M I C D E V E L O P M E N T T R E N D S
13 Upper Shirvan, Mughan and Salyan regions, Nakhchivan Autonomous Republic having the highest rates.
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especially in rural areas. Overcrowding, heat-
ing with non-clean fuel, lack of regular elec-
tricity supply and lack of access to piped
water are problems faced by a large section
of the IDP population and other vulnerable
groups.
With regards to social inclusion and pro-tection, a number of measures have been
introduced concerning the reform of the so-
cial security system. A mechanism of tar-
geted social assistance has been applied
since July 2006 in accordance with the law
on targeted state social assistance. This
mechanism mostly covers vulnerable strata
low-income families and the poor. As a
result, over 173 thousand families (790 thou-
sand people) are benefiting from social as-
sistance. Currently, the Azerbaijani Govern-
ment is working with the World Bank and
USAID in order to increase the effectiveness
and transparency in providing public pen-
sions and social assistance.
Key environment issues concern threats re-lated to climate change, air quality, water
quality, waste management, natural habitat
protection, coastal and marine pollution and
land use (in particular desertification). Azer-
baijan has made progress on climate change
related issues: i) a second national commu-
nication, a greenhouse gas inventory and
adaptation measures are under preparation;
ii) altogether 17 Clean Development Mecha-
29I . C O U N T R Y B A C K G R O U N D : S O C I O - E C O N O M I C D E V E L O P M E N T T R E N D S
The main conclusions on policy significance of poverty analyses
The following points should be taken into consideration when formulating policy priorities
with a human development focus:
It is necessary to promote labor-intensive economic development in the regions and
across different sectors.
It is necessary to ensure that employment is not low-wage and low-productivity i.e.
there is a need to work towards economic development which is labor intensive, but
which can also replace the high rates of underemployment (in agriculture sector).
Social protection measures need to ensure that vulnerable households with children are
provided with support.
The fact that higher education levels of heads of households reduce the poverty risk con-firms that the country has to invest in the human capital of future generation.
Poverty reduction in the past years has been largely driven by the increase in social trans-
fers, with pensions and targeted social benefits being the most important transfers. In the
interests of long term sustainable development, it is important that poverty reduction is
driven not only by social transfers, but also by increased employment and income-gen-
eration opportunities.
Box 1.2
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his chapter provides information
on the countrys overall compet-
itiveness and identifies the main
barriers and obstacles. The report analyzes
the structure and the evolution of foreignand domestic investment flows. In order to
elaborate concrete measures to enhance the
business environment, the results of Doing
Business Review are analyzed as well. The re-
sults of the following recent surveys and
studies undertaken in Azerbaijan were used
in the analysis of this report: i) Survey on In-
vestment Climate, Transport and Trade Facil-itation by AmCham (February 2008); ii) 2008
edition of the World Economic Forums Exec-
utive Opinion Survey, iii) "Enterprises' satis-
faction with business climate in Azerbaijan"
by GTZ (January 2009), and iv) "Study of small
and medium enterprises in Azerbaijan" by
IFC (January 2009).
A. Business Environment
After declaring its independence in 1991,
Azerbaijan implemented reforms in order to
liberalize the economy and to optimise the
investment potential for local and foreign en-
trepreneurs. At present, the business envi-
ronment in Azerbaijan can be considered
positive, but there remain a number of chal-
lenges to be tackled in order to enhance the
development patterns of the country.
The most recent World Bank Doing Busi-
ness 200914 Report ranked Azerbaijan as
33rd out of 181 economies (a year earlier the
country was on 97th place). During the last
year, Azerbaijan implemented 7 reforms re-
lated to doing business issues (Table 2.1) and
became a top reformer: i) the country cre-ated a one-stop shop for company registra-
tions, cutting the number of procedures
from 13 to 6 and reducing the time required
to up to 5 working days; ii) substantial
amendments were made to the Labour
Code in May 2007; iii) the country strength-
ened the legislative base of investor protec-
tion; iv) an online filing and payment system
with an advanced accounting software for
calculating taxes was introduced, etc.
The country reached a considerable increase
in the Global Ease of Doing Business rank, as
can be seen from the table. However there
remain issues that should be addressed
31
II. BUSINESS ENVIRONMENT
AND INVESTMENT POLICY
14 http://www.doingbusiness.org/ExploreEconomies/?economyid=14
T
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namely Construction Permits, Paying Taxes,
Trading Across Borders and Closing a Busi-
ness. In these areas of the Report the country
is placed in 155th, 102nd, 174th and 81st po-
sition respectively. Some of these issues are
analyzed in the next chapters of the report.
B. Business Registration
A company may start operations in Azerbai-
jan from the moment ofstate registration.
A new system of single window (one-stop-
shop) has been launched in January 2008.
Currently, all registration procedures of busi-
ness entities are carried out by the Ministry
of Taxes of the Republic of Azerbaijan. The
number of registration procedures was re-
duced from 15 to 5 (See: Table 2.2). A new
company is registered within 3 days after all
relevant documents are presented to the
Local Tax Authorities.
According to Doing Business 2009, 16 days
are required for the whole process.
32 I I . B U S I N E S S E N V I R O N M E N T A N D I N V E S T M E N T P O L I C Y
Ease of 2008 2009Change
in rank
Reforms
imple-
mented
Doing Business 97 33 +64
Starting a Business 66 13 +53 +
Dealing with Construction Permits 160 155 +5
Employing Workers 67 15 +52 +
Registering Property 63 9 +54 +
Getting Credit 25 12 +13 +
Protecting Investors 110 18 +92 +
Paying Taxes 143 102 +41 +
Trading Across Borders 176 174 +2
Enforcing Contracts 27 26 +1 +
Closing a Business 78 81 -3
Table 2.1: Azerbaijan's ranking in Doing Business 2008 and 200915
15 The ranking of 2009 is out of a total of 181 countries.
Source: World Bank, Doing Business 2009. http://www.doingbusiness.org/ExploreEconomies/?economyid=14
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C. Activity Licensing
Licensing was substantially simplified with
foreign investors' interests in mind. The Azer-
baijani licensing system was reformed in2002. The number of business activities re-
quiring a license was reduced from more
than 200 to 30. However, currently the list
reaches approximately 50 (See: Annex 4). Ac-
tivities requiring licenses and permits are
stipulated by Presidential Decree No. 782 On
Improving the License Issuance Rules for
Some Types of Activity dated September 2,
2002. This decree unifies the licensing rules
for all types of licenses and specifies: (a) the
business activities subject to licensing, (b) the
licensing authorities, and (c) the license fees
with regards to each business activity sub-ject to licensing. Additionally, the Presiden-
tial Decree No. 310 dated March 28, 2000
establishes certain limits and exceptions to
general licensing rules. Legal entities,
branches and representations of foreign
legal entities can obtain licenses for imple-
menting activities requiring a special permit
(license) according to the Law of the Re-
33I I . B U S I N E S S E N V I R O N M E N T A N D I N V E S T M E N T P O L I C Y
Table 2.2: Company registration procedures
List of pre-registration
procedures:
1. Issuing a decree on appointing the director of the legal entity to
be registered;
2. Preparing the charter (statute) of the legal entity to be registered;
3. Obtaining a confirmation of the legal address of the legal entity
from the proposed lesser;
4. Depositing the charter capital in a bank and obtaining a receipt;
paying the state registration fee and receiving a receipt;
5. Filing documents with the company registrar at the One Stop
shop Taxes, registering for VAT purposes;
Once a registration
certificate is obtained,
there are certain post-registration proce-
dures to be carried out
by the newly registered
legal entity:
1. Obtaining a company seal;
2. Certifying the signature of the authorized person (director) of the
entity in notary;3. Registering at the State Social Protection Fund;
4. Opening a permanent bank account (in AZN is obligatory, USD,
Euro and etc. accounts are acceptable);
5. Obtaining workbooks (if necessary, generally employees with a
previous employment history have workbooks) for employees
from the Local Employment Office of Ministry of Labor and Social
Protection of Population.
Source: World Bank, Doing Business 2009 http://www.doingbusiness.org/ExploreEconomies/?economyid=14
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public of Azerbaijan On business activ-
ity only after they have been registered. A
license is granted without discrimination to
any person/entity that satisfies the require-
ments for that specific license. Foreign legalentities and individuals, as well as branches
and representations of foreign entities need
to obtain licenses in accordance with Azer-
baijani legislation for carrying out a business
activity.
D. Currency Regulations
Currency regulation in Azerbaijan is carried
out by the Central Bank of the Republic of
Azerbaijan (the CBA, former National Bank of
Azerbaijan). Foreign exchange transactions
are regulated by the Law on Currency Regu-
lation. The CBA administers the overall en-
forcement of currency regulation. Various
aspects of foreign currency regulation alsocover, among other matters, precious metals
and foreign securities.
The currency regime of Azerbaijan was lib-
eralized and clarified in 2001 with the adop-
tion of the amendments to the Currency
Law. The liberalized provisions raise the thresh-
old amounts for currency that can be taken outof/remitted from/to Azerbaijan. In furtherance
of the amendment to the Currency Law, in
2002 the CBA replaced its regulations on
currency transactions. Furthermore, in 2004,
the CBA eliminated entirely the limitation on
the amount of overseas advance payments for
goods to be imported into Azerbaijan.
Both residents and non-residents16 must
comply with the following currency regula-tion requirements:
The manat is the only currency for pay-
ment for the sale and purchase of goods
and services in Azerbaijan, except where
the recipient has a CBA permit to render
services or sell goods using a foreign cur-
rency;
The purchase, sale and exchange of for-
eign currency in Azerbaijan must be car-
ried out through authorized banks or
authorized non-banking financial institu-
tions. Transactions conducted outside
these institutions are prohibited; and
The supply of goods, works and services in
exchange for the advance payment over-
seas must be completed within 365 days
of the advance. In case of failure to fulfilobligations in exchange for the advance
payment, the bank which made the trans-
fer must provide the CBA with the infor-
mation and documents relating to that
operation.
Currency operations involving the move-
ment of capital must be performed by resi-dent entities in the manner approved by the
CBA. The CBA, however, has not yet estab-
lished any procedure. In reality, no licensing
of currency operations involving the move-
ment of capital is required at present.
34 I I . B U S I N E S S E N V I R O N M E N T A N D I N V E S T M E N T P O L I C Y
16 The definition of resident includes private individuals having a permanent place of residence in Azerbaijan, and legal en-
tities established in accordance with Azerbaijani legislation. Branches and representative offices of foreign entities estab-
lished in Azerbaijan do not fall within the definition of a resident.
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Foreign exchange regulations are less re-
strictive for non-residents largely due to the
fact that non-residents bank accounts out-
side Azerbaijan are not regulated by the
Azerbaijani currency control rules. The CBAs2002 currency regulations now permit,
among other things, local banks to debt-fi-
nance non-residents projects in Azerbaijan
for a period of up to 180 days; these regula-
tions also introduced basic rules for non-res-
idents repatriation of foreign investments
from Azerbaijan.
E. Tax Policy
Tax policy in Azerbaijan is prepared by the
Ministry of Taxes and is carried out by the
Ministry of Finance, the Ministry of Taxes,
other state agencies and other organizations.
The Ministry of Taxes controls within its au-
thority the accurate calculation of state taxesand other budget revenues of the Republic
of Azerbaijan, their timely and full transfer to
the state budget and compliance with tax
legislation. The present tax policy imple-
mented in the country is regulated by the Tax
Code adopted in 2000 and numerous nor-
mative legal acts.
The tax administration system has been
significantly modernized within the last
ten years. By 2004, the Government imple-
mented a number of reforms aimed at es-
tablishing a strong foundation for modern
tax administration. The reforms included: (i)
the enactment of a consolidated tax code; (ii)
the establishment of a large full service tax-
payers unit; (iii) the application of automated
systems; and (iv) the creation of a taxpayers
services program. Since 2005, the modern-
ization process has continued with: (i) the
tightening of the VAT registration controls; (ii)
the implementation of an integrated com-puter system for all taxes; (iii) the introduc-
tion of electronic filing; (iv) the establishment
of a one-stop shop business registration in
early 2008; and (v) the strengthening of
human resources management and per-
formance measurement.
Azerbaijans tax system consists of state
taxes, taxes of the Autonomous Republic and
local (municipal) taxes. Main types of taxes
are the VAT, income tax for individuals, profit
tax for legal entities, road tax, land tax, prop-
erty tax, social security contributions (SSCs),
excise tax and customs duties. There is also a
turnover tax at rates of 2 to 4% collected
from small taxpayers in lieu of the VAT.
There are two different types of tax regimes
in Azerbaijan: statutory tax regime and an oil
consortia tax regime (PSA and HGA).
The companies that work predominantly in
the oil & gas sector under the Production
Sharing Agreements (PSA) are subject to the
oil consortia tax regime. With the enactmentof a Host Government Agreement (HGA),
governing activities on the Main Export
Pipeline BTC, Azerbaijan introduced a new
tax regime applicable to companies working
in connection with the pipeline. Companies
operating outside the PSAs and HGA activi-
ties are subject to a statutory tax regime
based on the Tax Code.
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Except for PSAs and HGAs, the Law17 of the
Republic of Azerbaijan on the Application of
a Special economic regime to oil and gas ac-
tivity for export, adopted on February 2,
2009, provides incentives for all companiesinvolved in oil and gas activities destined for
export.
One of the main directions of improving the
tax legislation is a step-by-step reduction of
tax rates. The profit tax rate was reduced from
27% to 20% in the period from 2000 to 2010,
VAT was reduced from 20% to 18%, while the
upper limit of the income tax for individuals
from 35% to 30%. At the same time, ac-
cording to the Law On Changes and
Amendments to the Tax Code of the Repub-
lic of Azerbaijan entered into force on Janu-
ary 1, 2010, the rate of income tax from
individuals doing business without estab-
lishing a legal entity was equalised to profit
tax of legal entities and set at 20 percent.
A Modern Telephone Center 195, the first
among CIS countries tax administrartions,
was estabilished in December, 2003 covering
Baku city and from May 1, 2006 the whole of
the country.
2005 was the starting-point of a new stage fortax services. Starting from this particular year,
implementation of the State Programme on
Improvement of Tax Administration in the Re-
public of Azerbaijan in 2005-2007 began. 39
large-scale measures covering 5 strategic di-
rections were implemented within a period of
three years. As a result of implementation ofthis programme, considerable improvements
were achieved in a range of strategic direc-
tions. The system of voluntary payment of
taxes was improved, the fight against tax fraud
was strengthened, the compulsory tax pay-
ment system was improved, the creation of tax
debts was prevented, a management system
was developed for tax authorities in line with
international standards and modern informa-
tion and communication systems were cre-
ated.
The introduction of an Automated Tax Infor-
mation System (ATIS) in 2006 can be consid-
ered as one of the main achievements in
recent years. ATIS, being one of the main proj-
ects focusing on the creation of e-govern-ment, implemented technological changes
in the tax system and caused a new qualita-
tive change in tax administration. The inte-
gration of the tax management into ATIS has
led to root changes in tax administration and
its establishment on the basis of international
standards.
The application of an electronic declaration
system was possible through the vast op-
36 I I . B U S I N E S S E N V I R O N M E N T A N D I N V E S T M E N T P O L I C Y
17 The new law provides the following incentives:
5% of profit tax to be calculated from the amounts paid to subcontractors or 22% as it is defined in the tax code
No land and property tax is applicable
VAT with 0% rate
VAT with 0% rate for imported goods
No custom tariffs are applicable to exported goods
Fixed amount (AZN 275) for custom clearance of materials and equipment to be brought to Azerbaijan regardless of
their actual price.
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portunities created by ATIS. Electronic decla-
rations in Azerbaijan were introduced in
2007 and e-taxes.gov.az an Internet Tax Of-
fice was created to enable the electronic
submission of tax declarations.
ATIS allows for an increase in the effective-
ness of tax control measures, as well as for
the application of modern technologies to
avoid tax evasion. In order to improve the
VAT administration and to organise a more
effective control of operations in this sphere,
a common depository account for VAT was
introduced on January 1, 2008, supported by
a special software. Electronic tax invoices
were introduced from January 1, 2010 with
the aim to further modernise the VAT tax ad-
ministration. The introduction of electronic
tax invoices creates favourable conditions to
simplify the administration for taxpayers, as
well as to increase the effectiveness of tax
control in this sphere.
In order to strengthen the measures for con-
trolling cash transactions and to enhance the
application of modern information tech-
nologies, the installation of electronic remote
transfer devices in taxpayers cash registers
started in 2010. The installation of such de-
vices will create the necessary conditions tofurther increase the effectiveness of tax con-
trol and transparency.
A system of online communication was
launched in March, 2010, allowing for an
electronic exchange of documents between
citizens, taxpayers and tax authorities within
the e-governance Project at the Ministry of
Taxes. This system was integrated into the in-
ternal communication system of the Ministry
by ATIS. Users can track the movement of
their documents sent via internet within the
tax authority in an on-line regime and have
a direct telephone contact with the execu-tor. All applications sent to the tax authority
via the On-line communication system have
the status of official documents. Taxpayers
can use the service for their internal com-
munication as well. The application of such
innovative approaches will continue further.
In order to motivate the development of en-
trepreneurship in the Republic of Azerbaijan
and to simplify business registration, the reg-
istration of businesses is carried out in a one-
window principle since 2008. The number of
registration procedures for commercial enti-
ties (business start-ups) in the Republic of
Azerbaijan was reduced from 13 to 5, while
the time required from 53 days to 8. As a
result of the application of the one-windowprinciple, the number of registered busi-
nesses increased by 30% in 2008 compared
to 2007.
Azerbaijan was highlighted as the top re-
former in the Doing Business 2009 report,
elaborated by the World Bank and the Inter-
national Finance Corporation. Azerbaijan in-creased its ranking from the 97-th position to
33-rd. The system of business registration
based on the one-window principle was
considered as the most successful reform in
the sphere of business registration in the
Celebrating Reform 2008 report and the Re-
public of Azerbaijan improved its position in
the Business start-up ranking from the 64-
th to 13-th position.
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The application of bilateral agreements with
other countries on avoidance of double-tax-
ation plays an important role in establishing
a favourable investment climate. Enhancing
the coverage of such agreements was one ofthe priorities of the Ministry of Taxes in the
past. Agreements on avoidance of double-
taxation have been signed with 39 countries
as of January 1, 2010.
It is worth mentioning that, notwithstanding
considerable improvements in the tax
system in recent years, the country was
placed only 102-nd among 181 countries for
the criterion of simplicity of payment of
taxes. The number of tax payments, the num-
ber of hours required for the preparation and
submission of tax declarations in a year is still
high. Considering various payments and tax
exemptions, the overall tax rate calculated as
the ratio of different taxes to commercial
profit is equal to 41.1%, which is higher thanin many countries, including Turkey and the
Russian Federation.
F. Investment Climate
Today, the country is the regional leader not
only in terms of overall economic growth butin attracting foreign direct investment.
Azerbaijan is in the top 20 in equity capital
attraction in absolute terms. This is mainly
due to the favorable environment created in
the lead sector of the economy i.e. the oil &
gas industry. The country has achieved a
gradual improvement in the overall legal
framework for investment activities in the
country through a number of normative and
legal acts facilitating the starting of a busi-
ness and reducing red tape obstacles. The
Government liberalized the economy for in-
ternational businesses and introduced a
number of laws and regulations in favor ofthe protection of interests of investors. Gen-
erally, the Azerbaijani legislation establishes a
very permissive national regime for FDI
FDI is welcome in any sectors where local in-
vestors are allowed to invest. Such regime
also exists for the privatization of the state
owned property. There are no special per-
missions or specific registration require-
ments for foreign investments.The foreign
investor may start his own business in
Azerbaijan with 100% foreign investment or
form a joint venture with a local partner.
There are no specific requirements for the
size of share or legal limitations for foreign
participation in a company and investment.
There are no additional general business li-
censes or permissions apart from generalbusiness registration for the start up. The
major economic policies are FDI element in-
clusive. For example, the Government lifted
limitations for foreign participation in the
banking sector. The privatization process is
open to foreign investors. Restrictions for FDI
are only limited to national security related
sectors.
Since 1994, Azerbaijan has attracted signifi-
cant amounts of foreign investment to further
develop its economy, especially the energy
sector. In recent years, about 50% of invest-
ment into the economy of Azerbaijan is for-
eign investment. Although in absolute terms
the value of foreign investment has increased
year by year, in relative terms, there is a grad-
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ual decrease, due to the increase of domestic
investments based on oil revenues inflow.
There has been a considerable increase of
FDI in non-oil sectors in recent years. Ac-cording to CBA information (See: Annex 5 and
Annex 6) 39.4% of FDI in 2007 and 48.3% in
2008 went to non-oil sectors. Obviously, after
large investments in the oil sector, in recent
years investment absorption of the oil sector
went down (the necessity for investments
decreased), and simultaneously, the inflow of
oil revenues raised the needs for consump-
tion of capital goods. This, in turn, increased
the demand for investments into non-oil sec-
tors. Furthermore, the oil sector has had a di-
rect influence on the development of the
non-oil sectors, through the construction,
services and communication sectors. As dis-
cussed above, recent reforms in the business
environment have started to play their role
in attracting FDI into the non-oil sector.
Since 2003, the share of total investment to
fixed capital of the non-oil sector increased
(See: Annex 6) and reached 69.6% of total in-
vestments in 2008 (50.1% in 2007). Strength-
ening capital fundamentals of non-oil
sectors is very important in order to to in-
crease the trade potential of these sectors.Analyses of investments to fixed capital by
sectors shows that in 2008 about 68.6% (in
2007 79.0%) of investments to the industry
sector went into the oil sector (in 2008 44.3%,
in 2007 60% of total investments to fixed
capital was directed to the industry sector).
Further analyses of the sectoral structure of
investments to fixed capital highlights very
relevant issues. Despite the fact that 69.6%
(in 2007 50.1%, in 2006 45.3%) of total in-
vestments to fixed capital was directed to
non-oil sectors, a detailed analysis shows that
most of the investments focused on non-
tradable sectors, such as production and dis-tribution of electricity, gas and water,
construction of dwellings, transport, storage
and communication, education, health and
social services. Only a very small portion of
investments to fixed capital was directed to
tradable sectors such as agriculture, manu-
facturing and processing.
There is a need to enhance incentives in
order to attract foreign investment, in addi-
tion to the incentives provided by the Pro-
duction Sharing Agreements (PSA) in the oil
and gas sector. Performance requirements
are not imposed on new investments, but in-
vestors who participate in the privatization
process of enterprises often assume specific
obligations regarding future investment andemployment. Foreign investors are not re-
quired to purchase from local sources or ex-
port a certain percentage of output.
Investors in PSAs assume obligations and re-
quirements as provided within the PSA.
Despite considerable achievements in at-
tracting FDI and enhancing the business en-